Aldrich v. McCulloch Properties, Inc.

Citation627 F.2d 1036
Decision Date05 August 1980
Docket NumberNo. 78-1872,78-1872
PartiesFed. Sec. L. Rep. P 97,600 Hillard H. ALDRICH and Amy Aldrich, Plaintiffs-Appellants, v. McCULLOCH PROPERTIES, INC., McCulloch Oil Company, Pueblo West Metropolitan District, Holly Development Co., John Doe and Richard Roe, Defendants- Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

Robert J. Dyer, III, Denver, Colo. (Gerald L. Bader, Jr., Denver, Colo., with him on brief) of Bader & Dufty, Denver, Colo. (and Richard A. Pundt of Silliman, Gray & Stapleton, Cedar Rapids, Iowa; Ronald L. Luehrsmann, Dyersville, Iowa; Edward Gallagher, Jr. and Edward Gallagher, III of Gallagher, Martin, Keith & Langlas, Waterloo, Iowa, with him on brief), for plaintiffs-appellants.

Thomas J. McDermott, Jr., Los Angles, Cal. (Howard O. Boltz, Jr., Los Angeles, Cal., with him on brief) of Kadison, Pfaelzer, Woodard, Quinn & Rossi, Los Angeles, Cal. (and Tuck Young of Lattimer, Bollinger, Young & Drummond, Pueblo, Colo., with him on brief), for defendants-appellees.

Before SETH, Chief Judge, McKAY and LOGAN, Circuit Judges.

McKAY, Circuit Judge.

Plaintiffs' appeal is from the district court's dismissal of their amended complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). Plaintiffs, purporting to represent a class of purchasers, filed this action more than eight years after purchasing subdivided lots in defendants' "Pueblo West" real estate development. The complaint as amended alleged that the lots were "securities" within the meaning of federal securities laws, Record, vol. 1, at 8, and that the defendants fraudulently concealed plaintiffs' causes of action. Record, vol. 1, at 42. Plaintiffs sought relief under the Securities Act of 1933, the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5, the Interstate Land Sales Full Disclosure Act (ILSFDA), and several pendent common law theories. The defendants moved for dismissal under Fed.R.Civ.P. 12(b). The district court ruled that the lots were not securities and that all of plaintiffs' claims were barred by the applicable statutes of limitations.

I. Existence of a Security

In granting the motions to dismiss, the district court first determined the complaint failed to allege the necessary elements of a "security" under federal securities laws. Plaintiffs urge that the purchased lots, combined with defendants' promises to develop, constitute "investment contracts" included in the statutory definitions of a security. See Securities Act of 1933 § 2(1), 15 U.S.C. § 77b(1); Securities Exchange Act of 1934 § 3(a)(10), 15 U.S.C. § 78c(a)(10). For the purposes of this appeal, we do not decide whether plaintiffs indeed purchased a security; we hold only that plaintiffs' allegations are sufficient to preclude determination of this issue on a Rule 12(b) motion.

The district court had before it only plaintiffs' complaint. Plaintiffs averred, inter alia, that they purchased lots with investment intent, that defendants encouraged investment purchases by promising the lots would increase in value because of defendants' activities in developing and providing amenities, and that defendants led purchasers to believe a trust would be established to construct and operate facilities for their common benefit. See Record, vol. 1, at 8, 12, 13-14.

These allegations conform roughly to the contours of the investment contract definition: a "contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." S.E.C. v. W. J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946). That the plaintiffs did not expect to realize any tangible gain until they sold their property does not preclude investment intent. "Profits" as used in the investment contract definition may be "capital appreciation resulting from the development of the initial investment." 1 United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975). Similarly, a common enterprise does not require the sale of undivided interests or an entirely separable and express management contract. See S.E.C. v. C. M. Joiner Leasing Corp., 320 U.S. 344, 349, 64 S.Ct. 120, 122, 88 L.Ed. 88 (1943). While there is language in the complaint from which it could be inferred that what plaintiffs purchased was not an investment in a common enterprise but merely individual parcels of real estate, resolution of these conflicting inferences was inappropriate without greater factual exploration.

A security is not always an easily recognized creature. See S.E.C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The nature of the asset involved is not important. 2

The test rather is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect. In the enforcement of (securities acts) it is not inappropriate that promoters' offerings be judged as being what they were represented to be.

S.E.C. v. C. M. Joiner Leasing Corp., 320 U.S. at 352-53, 64 S.Ct. at 124.

Central to this test is the promotional emphasis of the developer. See United Housing Foundation, Inc. v. Forman, 421 U.S. at 852-54, 856, 95 S.Ct. at 2051; S.E.C. v. W. J. Howey Co., 328 U.S. at 300, 66 S.Ct. at 1103; Continental Marketing Corp. v. S.E.C., 387 F.2d 466, 468 (10th Cir. 1967), cert. denied, 391 U.S. 905, 88 S.Ct. 1655, 20 L.Ed.2d 419 (1968); Davis v. Rio Rancho Estates, Inc., 401 F.Supp. 1045, 1049-50 (S.D.N.Y. 1975). Characterization of the inducement cannot be accomplished without a thorough examination of the representations made by the defendants as the basis of the sale. Fogel v. Sellamerica, Ltd., 445 F.Supp. 1269, 1278 (S.D.N.Y. 1978); Timmreck v. Munn, 433 F.Supp. 396, 402-04 (N.D.Ill. 1977). Promotional materials, merchandising approaches, oral assurances and contractual agreements were considered in testing the nature of the product in virtually every relevant investment contract case. See, e. g., United Housing Foundation, Inc. v. Forman, 421 U.S. at 853-54, 95 S.Ct. at 2060-61; S.E.C. v. C. M. Joiner Leasing Corp., 320 U.S. at 346-47, 346 n. 3, 64 S.Ct. at 121, 121 n. 3; Woodward v. Terracor, 574 F.2d 1023, 1024-25 (10th Cir. 1978); McCown v. Heidler, 527 F.2d 204, 209-10 (10th Cir. 1975); Continental Marketing Corp. v. S.E.C., 387 F.2d at 470; Jenne v. AMREP Corp., (1978) Fed.Sec.L.Rep. (CCH) P 96,343, at 93,166 (D.N.J. 1978). See also Securities Act Release No. 5347, (1972-73) Fed.Sec.L.Rep. (CCH) P 79,163, at 82,539. An action should not be dismissed without an exploration of these materials where, as here, the plaintiffs reasonably allege the existence of investment intent and common enterprise and where nothing in the complaint precludes the finding of a security.

Defendants place some emphasis on what they perceive to be the limitations read into McCown v. Heidler, 527 F.2d 204 (10th Cir. 1975), by this court in Woodward v. Terracor, 574 F.2d 1023 (10th Cir. 1978). This case, however, clearly does not go beyond the scope of the McCown rule as described in Woodward. In McCown we allowed the plaintiffs to amend their complaint to allege violation of federal securities laws by the developers of a recreational subdivision. We held that the developers' obligation to enhance the value of the otherwise worthless lots by providing amenities and the emphasis in their sales approach on investment rather than residence in the project created a factual question which survived a motion for summary judgment. See Woodward v. Terracor, 574 F.2d at 1026-27. In this case, the district court dismissed on the pleadings; therefore it could not delve into the contractual obligations or the sales approach emphasis of the defendants.

Upon examination of additional evidence on remand, it may become apparent that the plaintiffs cannot satisfy the minimum requirements for surviving summary judgment under McCown and Woodward. Clearly the lots are not securities if the purchasers were induced to obtain them primarily for residential purposes "to occupy the land or to develop it themselves." S.E.C. v. W. J. Howey Co., 328 U.S. at 300, 66 S.Ct. at 1103. See United Housing Foundation, Inc. v. Forman, 421 U.S. at 853, 95 S.Ct. at 2060; Woodward v. Terracor, 574 F.2d at 1025; McCown v. Heidler, 527 F.2d at 211. Similarly, if the benefit to the purchasers of the amenities promised by defendants was largely in their own use and enjoyment, the necessary expectation of profit is missing. See United Housing Foundation, Inc. v. Forman, 421 U.S. at 857, 95 S.Ct. at 2062. See also Grenader v. Spitz, 537 F.2d 612, 618-19 (2d Cir.), cert. denied, 429 U.S. 1009, 97 S.Ct. 541, 50 L.Ed.2d 619 (1976). Indeed, the facts may show that defendants were under no obligation by contract or promise to provide significant development services for the benefit of purchasers. Furthermore, the obligation to perform minimal managerial functions or to provide basic improvements does not transform a real estate sale into a securities transaction. The real burden of management and development, even by the most liberal tests, must rest on the developers. See S.E.C. v. W. J. Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 1102, 90 L.Ed. 1244 (1946); Woodward v. Terracor, 574 F.2d at 1026; S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973); Timmreck v. Munn, 433 F.Supp. 396, 403 n. 4 (N.D.Ill. 1977). 3

II. Statute of Limitations

On the face of the complaint, it is clear the applicable limitations periods have expired if measured from the date of plaintiffs' lot purchases. Plaintiffs, however, point to their allegations that defendants concealed the problems at Pueblo West as sufficient to toll the limitations periods. 4 The...

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